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Exam 22: S Corporations

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Question 61

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Which of the following statements is correct?

A) The LIFO recapture tax is paid in five annual installments.
B) The LIFO recapture tax precludes an S corporation from using the LIFO method.
C) The LIFO recapture amount increases the corporation's adjusted basis in its inventory.
D) The LIFO recapture tax does not apply to S corporations with no earnings and profits from prior C corporation years.
E) None of the choices are correct.

F) A) and B)
G) B) and E)

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Question 62

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Like partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

A) True
B) False

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Question 63

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Vanessa is the sole shareholder of V Corporation. V Corporation was formerly a C corporation but is currently an S corporation. At the end of 2017, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated E&P from its years as a C corporation was $10,000. On July 1, V Corporation distributed $60,000 to Vanessa. What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis afteraccounting for the distribution?

Which of the following is not considered a family member for purposes of the Scorporation shareholder limit test?

Which of the following is prohibited from being an S corporation shareholder?

S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation.

Suppose at the beginning of 2017, Jamaal's basis in his S corporation stock is $1,000, and he has a $10,000 debt basis associated with a $10,000 loan he made to the Scorporation. In 2017, Jamaal's share of S corporation income is $4,000, and he received a$7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2017. On December 31, 2016, Neal Corp. reported earnings and profits of $150,000. Beginning in 2017, Neal Corp. reported the following information. Does Neal Corp.'s S election terminate due to excess net passive income? If so, what is the effective date ofthe termination?

If Annie and Andy (each a 30% shareholder in an calendar year S corporation) file a revocation statement on February 10, 2017 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

RGD Corporation was a C corporation from its inception in 2012 through 2016. However, it elected Scorporation status effective January 1, 2017. RGD had $50,000 of earnings and profits at the end of 2016. RGDreported the following information for its 2017 tax year. What amount of excess net passive income tax is RGD liable for in 2017? (Round your answer for excess net passive income to the nearest thousand).

Clampett, Inc. has been an S corporation since its inception. On July 15, 2018, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2018, was $45,000. For 2018, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizesrelated to Clampett, Inc. in 2018?

Suppose at the beginning of 2017, Jamaal's basis in his S corporation stock is $0, he hasa $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2017, Jamaal contributed $8,000 to the Scorporation, and the S corporation had ordinary income of $4,000. Assume that Jamaalowns 40% of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

Maria, a resident of Mexico City, Mexico, formed MZE Corp. in Mexico under Mexican law but planned to do business in the United States. Is MZE eligible to elect S corporation status in the United States? Explain.

Assume that Clampett, Inc. has $200,000 of sales, $150,000 of cost of goods sold,$60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc. has$1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 35%. Clampett, Inc.'s taxable income would have been $122,000 this year if it had been a C corporation. What is Clampett, Inc.'s excess net passive income tax?

XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equalshareholders. On September 15, 2017, XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares) to his solely owned C Corporation Zach, Inc. Absent permission from the IRS, what is the earliest date XYZ may again elect to be taxed as an S corporation?

At the beginning of the year, Harold, Missy, and Ranae formed HMR Corporation as an Scorporation. For one-third of the HMR stock, Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000. The land was subject to a $45,000 mortgage, which was assumed by HMR on the formation. Missy and Ranae each contributed$80,000 cash to HMR for one-third of the HMR stock. What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

Like partnerships and C corporations, S corporations face the same restrictions on using the cash method of accounting.

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree.

To make an S election effective as of the beginning of the current year, an S corporationmust file IRS Form 2553 within 3½ months after the beginning of the year.